Stockmen’s association supports checkoff changes

Cattle Market & Farm Reports, Editorials
Oct 22, 2007
by WLJ

—Studies begin to question sustainability of the ethanol industry.

FUSDA moved its corn crop expectations higher as part of the Oct. 1 Crop Production report. According to National Agricultural Statistics Service (NASS), the total national corn production will reach 13.3 billion bushels, up 26 percent from 2006. The number was on the low end of analysts’ expectations and the news spurred corn prices to move slightly higher following the report, according to Virginia Tech Commodity Marketing Agent Mike Roberts.

Based on crop conditions when the report was compiled, yield will average 154.7 billion bushels of corn per acre nationally, up 5.6 bushels from last year’s average with much of the increase coming in the Plains, central Corn Belt and Mississippi Delta. According to NASS, there are 86.07 million acres planted to corn this year in the U.S., a substantial increase from last year’s 70.6 million acres, as farmers take advantage of the ethanol-fueled increase in corn prices.

Already, as a result of favorable harvest weather conditions, corn harvest is well ahead of normal, reaching 53 percent complete last week, 14 percent ahead of last year and 12 percent higher than the five-year average. In the central Corn Belt where the crop maturity was promoted by favorable harvesting conditions, harvest was 20 percent ahead of 2006. In other regions, harvest progress last week was reported from 1 percent to 12 percent ahead of last year. In Kentucky, North Carolina, Tennessee, and Texas, corn harvest was reportedly near completion. Although harvest was looking good, wet weather in the forecast late last week threatened to derail farmers’ efforts. Across the Midwest, growers were working to get as much grain harvested as possible in an effort to avoid rewetting the crop and the potential for mold that comes with precipitation.

Roberts said producers may want to lock in corn crop prices soon to protect profits from any downside pressure during harvest.

“Producers having sold 60-70 percent of this year’s crop are in good shape as this market trades sideways. If you have any corn left un-priced, now would be a good time to consider locking it in,” he said.

In addition to the crop condition report, NASS issued the World Agricultural Supply and Demand Estimate (WASDE) last week which added fuel to the bullish corn news. USDA raised its forecasts for U.S. corn exports, predicting U.S. corn exports could reach their highest levels in nearly two decades. The possibility that European Union nations could lift their ban on genetically modified imports could quickly build on that number if the news comes as expected in the next few weeks.

According to the WASDE report, exports of U.S. corn are expected to increase by 100 million bushels during the 2007/2008 marketing year, which is likely to offset the reduced expectations for usage by the ethanol industry which has cooled off in the second half of the year. NASS lowered expected ethanol corn usage by 100 million bushels for the second month in a row. U.S. corn exports are expected to reach 2.35 billion bushels during the ’07/’08 marketing year as a result of a sliding U.S. dollar in the currency markets and poor growing conditions in several countries which impacted foreign production. According to Mike Woolverton, Extension grain economist at Kansas State University, China, in particular, was hit by weather related crop reductions.

“China just announced they will export no more corn this year. Drought in the North China Plain reduced corn yields and even though China is not a large corn exporter, it leaves the United States as the major corn exporter in the world. By the end of the ’07/’08 marketing year, U.S. exports of corn may be far greater than the current WASDE projection,” he said.
Woolverton also noted the reduction in expected corn usage by the ethanol industry in his report. Domestic ethanol plant usage of corn will need to be watched closely,” he said.

“Higher corn price, given the low ethanol price, is pushing ethanol producers even more into the red. The USDA dropped projected ethanol purchases of corn by 100 million bushels in this report. Unless the profit picture improves, it could go lower.”

That profit picture looks grim for much of the ethanol industry, according to several analysts. The news that several ethanol plants are either slowing their plans for expansion or cancelling construction altogether could further reduce usage estimates and cause farmers to shift acreage to other crops next year.

According to a research note published by Wells Fargo analyst Michael Swanson, the corn usage by the ethanol industry, as calculated by USDA, could be overstated.

“The USDA’s 3.2 billion bushel estimate implies another 2.1 billion gallons of supply. My estimate of balance ethanol production needs calls for 2.4 billion bushels of corn usage. And that estimate might be too aggressive to recover the historical (ethanol versus crude oil price) spreads,” Swanson said.

He said a better estimate of ethanol usage of corn, which includes factoring in the usage of co- products by the animal feeding industry, indicates that only 82 million acres of corn will be needed next year to meet all demands.

“That wouldn’t do anything to reduce corn stocks,” Swanson said. “I am sure that this represents the most bearish analysis in the market. Even so, I will put my detailed weekly analysis of gasoline with ethanol distribution up against most of the warm and fuzzy hopes for China to ride to the rescue with huge export demand.”

He said that a swing of 15 million corn acres back into wheat and soybean production next year will cause rapid corrections in both markets.

“This means producers need to be aggressively marketing on all fronts,” Swanson said. “If ethanol can’t pull the corn train at $4 a bushel, all bets are off.” — John Robinson, WLJ Editor